European Affairs

IS ECONOMIC MOBILITY IN EUROPE SURPASSING THE OLD AMERICAN DREAM?     Print Email

It has long been commonplace for Americans and Europeans to define their social models in opposition – with Americans priding themselves on having the most  dynamic and upwardly mobile economy while Europeans emphasize their welfare states’  success in providing  a more extensive safety net  and limiting income inequality.

garretmartinNow, however, studies challenge this conventional wisdom. They bring to light dimming prospects for economic mobility in the U.S. and widening income inequality in Europe. These documented (and perceived) changes have become a major talking point for politicians, notably 2012 presidential candidates in the U.S. and France such as Barack Obama and Francois Hollande, the Socialist currently leading in French opinion polls.

A December 2011 OECD (Organization for Economic Cooperation and Development) report, entitled “Divided We Stand: Why Inequality Keeps Rising” surprised observers by confirming that widening income inequality was far from a uniquely American phenomenon. The U.S. still shows higher degrees of inequality than many other OECD members, but the new report showed, for example, that Britain’s income inequality rose faster between 1975 and 2008 than in any other OECD country.  Of the 22 countries surveyed, 17 showed rises in their “Gini coefficient” of income inequalities, including in more traditionally egalitarian countries such as Germany or the Nordic states (see figure 1).  (The Gini coefficient is regularly used as a measure of inequality with a coefficient of zero expressing perfect equality while 100 expresses maximum inequality.)

oecdchart201202

Source: OECD Database on Household Income Distribution and Poverty.

 

The OECD said that the changes represent wage inequality, technological progress that rewarded high-skilled workers at the expense of others, and the increase in low-paid work including part-time employment. It noted that tax and benefit systems were becoming less effective at redistributing wealth, especially since the mid-1990s. Rising incomes at the top are thus far outpacing welfare payments because of reduction in benefits and tighter eligibility rules.  Based on the report, OECD Secretary-General Angel Gurría warned that “the social contract is starting to unravel in many countries…without a comprehensive strategy for inclusive growth, inequality will continue to rise.”

Across the Atlantic, the notion of America as a land of opportunity is also under scrutiny. A report conducted by the Economic Mobility Project [EMP] and the Brookings Institute offers a fairly positive outlook when it comes to absolute mobility, but the income growth of children, as compared with their parents, has slowed.  As Winship points out, “while the vast majority of Americans end up better off than their parents, the difference is probably not as great as the improvement of their parents over their grandparents was.”

On economic mobility, the EMP/Brookings Institute report paints a very bleak picture.  Dividing parent and child generations into fifths on the basis of each generation’s income distribution, children born to parents with an income in the bottom quintile are highly likely (42 percent) to also end in the bottom quintile in adulthood. Conversely, those born to parents in top fifth the top rung are very likely to stay on the top rung in adulthood (39 percent).  Only six percent of children born to parents at the bottom make it to the top of the income distribution. Further, studies suggest that in America having a parent with a high income is one of the biggest predictors of a child’s economic success,  as pointed out by Isabel Sawhill and John Morton.

Perhaps most surprising of all is that the numbers underline that the U.S. does not fare well in comparison to some of its European counterparts in economic mobility. Generally speaking, nowadays, American sons’ earnings appear to remain far more closely correlated to their fathers’ earnings than is the case elsewhere in Europe, with the exception of Britain (see figure 2).

brookingschart201202

 

Furthermore, children born to parents with an income in the “bottom fifth” are more likely to also end in the bottom quintile in adulthood: 42 per cent in the U.S. compared to between 25 and 30  percent for more mobile Denmark, Sweden, Norway, Finland and, in this regard, even Britain.

Interpreting these numbers is far from easy, as cogently argued in an article by Jason DeParle. Certainly, the depth of American poverty, including the higher rates of incarceration, the fact that the United States is less unionized than European countries, which may push lower wages down, and the high rewards that American employers give for college degrees all play a role. And immigrants, not included in these inter-generational studies, may prove a wild card.

Part of the difficulty of comparisons is the fact that Americans need to travel a higher distance to move up the economic ladder. The New York Times data shows that a Danish family can move from the 10th percentile to the 90th percentile with $45,000 of additional earnings while an American family would need an additional $93,000 to match that rise. .

Coming at a time of economic stress and much frustrated criticism of the social models on both sides of the Atlantic, the upshot of these findings should ring alarm bells for the established order and political leaderships in the EU and the U.S.

 

Garret Martin is an editor-at-large for European Affairs.